Prashant's Weblog
Random Brain "Droppings" of yet another software engineer

Thursday, May 04, 2006

high oil prices +no USA intervention = IT slowdown

Iranian deputy oil minister Hadi-Mohammad Nejad-Hosseinian recently foreboded that the price for a barrel of oil may hit $100. Now why honourable minister chose Delhi to transfigure himself to become Nostradamus is secondary thing, but the bigger question is, if minister's premonitions were to come true then are we again likely looking down on another round of slowdown in 2007-2008, like the one we have seen in 1990-91?

If we happen to look back in time,we can see three time frames 1973-74, 1979-80 and 1990-91 when the economies of many countries plummeted severely and one thing common during these chunks of time was the sky piercing price of crude oil as we have today, so is the history repeating again and if so whats the impact of it on IT sector in Bangalore?

Well...difficult to say if history will repeat. TOI had a good article on rising oil prices and how USA would make the difference between slowdown and no-slowdown. It said, if USA flexes it muscle power and use its influence to convince the "friendly"(read it as non Iran) OPEC countries to increase there daily quota of oil production things will get better. Also it said, things will be better if USA could quickly make amends to the things it badly screwed up in Iraq and get Oil flowing from Iraq.

Now how will all of this affect IT sector? it does and it does indirectly, the moment your crude increases, the cost of basic materials cement, Iron, Copper etc. shoot up..once they go up, they drag the prices of other commodity along with them, now as a country cannot print more money just like that, the number of commodities that can be bought per rupee decreases, in hi-fi terms we say "Inflation" has set in. So because of Inflation, demand plummets and as demand decreases and raw material prices increases, the inventory with a company increases and operating cost increase, margins and profits take southbound direction. With less cash in hand, companies don't have money to invest in new initiatives like Information Technology, with less investment in IT, less jobs get created and many existing jobs get "pink-slipped". Yeah continuing high crude prices would be like boarding pass for IT sector to time travel back to 2001(though 2001 slowdown was for different reason).

Looks grim right! but I believe chances of this happening are less. Before it gets to this stage, USA would intervene. why you ask? I guess 2 reasons...1) For its own good..US economy is slowing down and the Gov would do every thing to make sure the prevailing oil prices do not become a death noose for them. 2) Elections are nearing(2008) and Republican want themselves to be elected again, so I am sure republicans will leave no stone unturned to make sure that people don't use the high fuel prices as a pretext to vote them out.

what ever...I seriously hope Hadi-Mohammad Nejad-Hosseinian is wrong and he is just trying to scare off US. Hope India continues to grow at 8% (Golly!! 8%) ....ok 7% - 7.5% and all people have good jobs, healthy lifestyle and let peace prevail everywhere. Amen.


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